USD/JPY Forecast: Japan Retail Sales Impress as Focus Turns to US Inflation

Inflation and Retail Sales Put the Bank of Japan in the Spotlight

On Friday, inflation figures for Tokyo and retail sales figures put the USD/JPY in the spotlight.

The annual inflation rate for Tokyo remained at 2.6% in March. Economists forecast a 2.7% inflation rate. However, the core inflation rate fell from 2.5% to 2.4% in March.

Retail sales figures for February were also important, with the BoJ eyeing consumer spending and services to fuel demand-driven inflation.

Retail sales increased by 4.6% year-on-year in February after rising 2.1% in January. Economists forecast retail sales to increase by 3.0%.

Despite predating Spring negotiations, February saw accelerated wage growth. The figures gave the BoJ a look at the effects of wage growth on consumer spending in the current macroeconomic environment.

In January, the overall wage income of employees increased by 2.0% compared with 0.8% in December. Average cash earnings increased by 2.0% year-on-year after rising by 1.0% in December.

Understanding Industrial Production and Labor Data’s Impact on Policy Outlook

Other stats included unemployment and industrial production figures. The macroeconomic environment could be pivotal to households loosening the purse strings after the recent wage hikes.

Industrial production fell by 0.1% in February after sliding by 6.7% in January. Economists forecast industrial production to increase by 1.4%. The unemployment rate increased from 2.4% to 2.6% in February. Economists expected the unemployment rate to remain unchanged at 2.4%.

The USD/JPY responded to the economic indicators, falling to a low of 151.367 before rising to a high of 151.470.

After the inflation and retail sales figures, investors must continue monitoring Bank of Japan commentary. In recent speeches, BoJ Governor Kazuo Ueda and Board members signaled a slow move toward policy normalization. Dovish comments could draw the Japanese government into more intervention threats to bolster the Yen.

A deteriorating labor market environment amidst an uncertain macroeconomic environment could impact consumer spending trends.

Event Alert: US Personal Income and Outlays Report

The heavily anticipated Personal Income and Outlays Report will garner investor interest on Friday. Hotter-than-expected inflation numbers may sink investor bets on an H1 2024 Fed rate cut.

Economists forecast the Core PCE Price Index to increase 2.8% year-on-year in February. The Core PCE Price Index rose by 2.8% year-on-year in March.

While the Core PCE Price Index will be the focal point, personal income and spending also need consideration. Upward trends in personal income and spending numbers could fuel demand-driven inflation. A higher-for-longer Fed rate path may impact borrowing costs and reduce disposable income. Downward trends in disposable income could curb consumer spending.

Economists forecast personal income and spending to increase by 0.4% and 0.5%, respectively. In January, personal income and spending rose by 0.4% and 1.0%, respectively.

Beyond the numbers, Fed Chair Powell will speak at the Macroeconomics and Monetary Policy Conference. Reaction to the Personal Income and Outlays Report warrants investor focus. Before the February numbers, Fed Chair Powell signaled rate cuts will begin this year.

Short-term Forecast

Near-term trends for the USD/JPY will hinge on the Personal Income and Outlays Report. Higher-than-expected inflation, income, and spending trends could cut bets on an H1 2024 Fed rate cut. Fed reaction to the report also warrants investor attention. However, positive figures may have a limited impact on the USD/JPY amidst intervention threats from the Japanese government.

USD/JPY Price Action

Daily Chart

The USD/JPY hovered well above the 50-day and 200-day EMAs, affirming the bullish price signals.

A USD/JPY breakthrough at the 151.685 resistance level would support a move to the 152 handle.

The Japanese government, the BoJ, the US Personal Income and Outlays Report, and Fed Chair Powell need consideration.

Conversely, a USD/JPY drop below the 151 handle could give the bears a run at the 50-day EMA. A break below the 50-day EMA would bring the 148.529 support level into play.

The 14-day RSI at 62.23 suggests a USD/JPY move to the 152 handle before entering overbought territory.